Out on the Horizon

Economists are counting on the corporate sector to pick up the slack. After three consecutive profitable years, large companies are sitting on stockpiles of cash, and inventories are low -- business inventories have fallen by an annualized $35 billion in the first three quarters of 2005, according to Commerce Department data, and some economists say that companies are primed to build them back up. That could contribute to growth in 2007.

One indicator of the economy's outlook is already predicting recession. Usually, long-term interest rates are higher than short-term interest rates. Once in a while, that situation reverses itself, indicating investors believe the economy will be slowing. Such a shift, called an "inversion of the yield curve," has foreshadowed each of the last six recessions (but falsely predicted one in 1998).

It happened last week, as the yield on a 10-year Treasury bond rose above that for a two-year bond.

"I do believe the bond market is trying to tell us something," said Scott Anderson, an economist with Wells Fargo & Co. "Whenever the yield curve inverts, one ignores that fact at their peril." Other economists think that the indicator is less useful as an economic predictor now than in the past.

With rumblings of a slowdown, possibly even a significant one, economists generally expect the Federal Reserve to stop raising interest rates soon, after a 19-month span during which it has raised the benchmark federal funds rate 13 times, most recently on Dec. 13, to 4.25 percent. Inflationary pressures, they argue, have been tamed, and raising rates too much higher would threaten the expansion. Many analysts expect the Fed to raise rates two more times, to 4.75 percent, once at Chairman Alan Greenspan's last meeting of the Federal Open Market Committee and once at the first committee meeting led by Ben S. Bernanke, his presumed successor.

"Bernanke will want to raise rates at least once after he takes over on Feb. 1, 2006," writes Diane C. Swonk, chief economist of Mesirow Financial Holdings Inc. "This will help establish his inflation-fighting credibility with financial market participants."

There are other risks -- and some things that could surprise positively -- in the economic outlook.

Energy prices are one of the big uncertainties. According to Bloomberg News, the price of oil averaged $56.70 a barrel in 2005, up 37 percent from 2004. Analysts surveyed by Bloomberg expect that price to average $58 in 2006.

Some forecasters expect the trade deficit, which was a record $68.9 billion in October, to ease in 2006, as Americans import fewer goods and save more amid slower consumer spending. That would improve economic output, particularly if it is accompanied by an increase in exports.

The economists surveyed expect the dollar to weaken against other major currencies, which could both result from and aid that trend; the consensus was that a dollar will buy 111 yen at the end of the year, down from 119 now, and that it will by 0.8 euros, down from 0.85 now.

Then there are the ultimate imponderables -- terrorist attacks, hurricanes, earthquakes, corporate collapses, political events and anything else that could shake the nation's economy. But whether any such unforeseen events have much impact will depend on how strong the underlying economy is, analysts argue.

After the Sept. 11, 2001, terrorist attacks, the nation slid into recession. But that may have reflected more the tenuous state of an economy reeling from the collapse of the stock bubble and technology companies than the damage of the attacks per se. In 2005, Hurricanes Katrina and Rita and the resulting spike in fuel prices caused barely a macroeconomic blip, because the economy was on solid footing at the time. That's why economists are keeping their eyes on the housing market and consumer spending, which have been mainstays of the economy in recent years.

"We're taking a major source of growth and turning it into a drag," said Zandi, the Economy.com analyst. "At that point, the economy will be vulnerable to any other thing that might go wrong."